Who is to Blame for the Great Recession?

Abstract:     
In the 1970s the world experienced a serious economic crisis, which was widely attributed to the need to recycle petro dollars. In the 2000s the same need for recycling existed to an even greater degree because of large Chinese trade surpluses that added to those of petro producers.

Some analysts consider these surpluses and the matching current account imbalances to have been the ultimate cause of the Great Recession; some analysts blame US Federal Reserve policies; others the irresponsible practices of financial institutions in the United States.

This paper uses empirical information and economic theory to show that the primary causes of the recession were the non-market policies of China and energy producing countries, which resulted in the current account imbalances.

The savings of these countries did not have the normal beneficial effects on global investment because they were used to buy only US debt instruments and none of other developed countries. This asymmetric effect was the result of the fixed exchange rate, which the surplus countries maintained against the dollar and not against other currencies that otherwise might have shared the burden of absorbing the high levels of savings.

The observed expansionary US monetary and fiscal policies, faulty US housing policies and risky financial sector practices were accommodating the demand for assets from the surplus countries and prevented the development of an earlier recession.

Number of Pages in PDF File: 21

Keywords: global imbalances, US monetary policy, financial sector problems

JEL Classification: E65, E66

working papers series